Global Events and Their Impact on the Indian Stock Market

The US Fed announced a 50 basis point cut in the interest rate on 19th September 2024. As a result, the Indian market indices touched new highs, and the market subsequently ended with many instances of profit bookings. This is how international markets and foreign economic events impact the Indian markets.

The world is more connected than ever. Events in one region can affect the opposite side of the globe, and financial markets, too, are interlinked. International trade and globalized businesses mean economic and political events in one country will impact others, especially those with trade ties.

Since most currencies are pegged to the US dollar, changes in the United States can influence global currencies and stock markets. So, how does this affect the Indian market? Is there a discernible pattern? How to invest in share market as per these events? Let’s explore the various aspects of this impact and how different events influence the Indian market.

Currency Fluctuations:

Currency exchange rates fluctuate due to factors like GDP, interest rates, inflation, political stability, and geopolitical events. These changes affect the demand and supply of a currency, which in turn impacts the market.

You might have read articles like, “The Indian Rupee has weakened against the dollar, moving from Rs.81 per dollar to Rs.83 per dollar, likely affecting the market.” But what does this mean?

When the Rupee weakens, export-oriented companies in India benefit because their products become more competitive internationally. On the other hand, if the Rupee strengthens, companies relying on imports, like those using raw materials or technology, may face higher costs, negatively affecting their business.

For example, in 2013, the Indian Rupee dropped from Rs 55 per dollar in January to Rs 65 per dollar by September, losing about 15% of its value. Since India is a country that imports heavily, this fall in the Rupee’s value led to a simultaneous weakening of the NIFTY index.

Global Finance Policies:

Central banks regularly revise monetary policies and interest rates to control inflation and support stability and growth. These adjustments, especially in developed economies, are key in shaping global liquidity. Take the US Fed’s rate hike in March 2023, for example. When the Fed raises interest rates, it affects borrowing costs in the US, making domestic investments more appealing to foreign investors. As a result, they may shift their funds away from riskier markets like India, where returns are relatively lower. This shift can hurt India, as foreign investors pulling out affects market stability.

Geopolitical Events:

When global geopolitical tensions rise, institutional investors often reassess risks in specific countries or regions facing conflicts. However, it’s often done without considering which economies are directly or indirectly affected when they pull capital from emerging markets. Take the Ukraine crisis, for example. India had minimal trade ties with Russia, yet its markets experienced heavy volatility.

Large foreign institutional investors (FII) pulled out of Indian equities, not because of India’s direct involvement but due to concerns about rising oil prices and slowing global growth. Geopolitical events tend to have spillover effects, even on countries not directly involved. To make matters worse, the combined impact of COVID-19 and the Russia-Ukraine war shook the Indian markets further. The BSE Sensex dropped by 4,000 points in just the first 20 days of the war in FY2021.

Global Economic Policies:

The global economy is deeply interconnected, so the monetary policies of major economies like the U.S., Japan, and the E.U. significantly impact emerging markets like India. The most significant geopolitical risks in the Indian stock market often come from uncertainties around global monetary policies, particularly interest rates.

For example, the fear of a U.S. recession raised expectations that the U.S. Federal Reserve might cut interest rates, which often results in a large outflow of funds in India. This, in return, put pressure on the rupee and Indian stock markets.

Another example is when the Bank of Japan increased its interest rates, strengthening the yen. While that made Japanese exports more competitive, it affected the profitability of Japanese companies and increased market volatility across Asia. For India, the impact was twofold.

On the one hand, a stronger yen made Indian exports more competitive globally, benefiting industries like IT and pharmaceuticals. On the other hand, the increased volatility in Asian markets, particularly Japan and South Korea, added uncertainty to the Indian stock market.

Commodity Price Change:

Commodities are raw materials or primary products like grains, oil, and metals bought and sold in specialized market exchanges. In India, which imports large quantities of commodities such as oil and metals, any price rise in these materials can directly affect companies that rely on them. When their costs go up, profitability tends to drop, leading to a potential decline in their stock prices.

On the other hand, India is also a major exporter of products like textiles and certain agricultural goods. When the prices of these exported commodities rise, it can boost earnings for the businesses involved, positively impacting their stock values. Higher commodity prices in India can also lead to inflation. This reduces people’s purchasing power and negatively affects market sentiment.

The impact of international events on the Indian stock market is significant in today’s global economy. As an investor, it’s essential to keep an eye on global developments and understand how they influence market sentiments. However, it’s important not to view these events in isolation.

Along with international occurrences, domestic institutional reactions play a key role in shaping the bigger picture. Combining both gives you a clearer understanding of the correlation between global events and the Indian markets. By staying informed and flexible, you can manage geopolitical risks better and continue to build wealth over time with the help of a financial advisory.

FAQs:

• What is FDI?

Foreign direct investment (FDI) happens when someone from one country invests in a business in another, aiming for a long-term interest. It plays a big role in connecting economies globally and benefits the host country.

• How do crude oil prices affect the Indian market?

When crude oil prices rise, companies face increased production and distribution costs. This affects their profit margins and can lower share prices. The impact is even more significant since India imports over 85% of its crude oil.